5 Best Dividend Index Funds for Retirement Income
These high-dividend index funds can reward you in retirement
Waiting for the assets in your retirement portfolio to appreciate isn't the only way to secure your income in retirement. Dividends, which are payouts issued to shareholders of a company from its profits, can provide a sustainable income source in your golden years.
One way to get exposure to dividend-paying stocks with a solid dividend history is to invest a portion of your portfolio in a dividend index mutual fund or a dividend index exchange-traded fund. These funds pay you income in the form of dividends distributed by the company issuing stock held in the fund. The issuing companies generally distribute dividends to the dividend fund that are then funneled to the shareholders.
The distributions from a high-yield dividend index fund vary and correlate with a particular market index. However, companies often pay dividends that grow at a rate outpacing that of inflation. This means that having dividend-paying stock in your portfolio can provide a hedge against inflation. Even if the purchasing power of your assets were to decrease because of inflation, you would still get dividends to help you maintain your spending level.
The best dividend index funds offer a high dividend yield and a low expense ratio—which is a fund-management fee that reduces your return on the fund. One or all five of these dividend index funds can be an appropriate addition to a diversified retirement income portfolio.
One of the best dividend index funds, the SPDR S&P Dividend ETF contains stock in 112 companies that are known as the "dividend aristocrats." These are companies that have the highest dividend-yielding stocks listed in the S&P Composite 1500 Index. The firms have increased dividends every year for at least 20 consecutive years, providing retirees with a consistent cash flow.
This fund tracks the S&P High Yield Dividend Aristocrats Index. The current yield, also known as the SEC 30-Day Yield, is 2.52% as of April 2021. The expense ratio is 0.35%.
The Vanguard Dividend Appreciation ETF contains stocks in 182 companies that have increased dividends in each of the previous 10 years. The fund tracks the NASDAQ US Dividend Achievers Select Index (formerly the Dividend Achievers Select Index). As of April 29, 2021, the current yield is 1.61%. As a passively managed fund, the ETF offers a low expense ratio of 0.06%, which allows you to keep more of your investment gains.
The iShares Select Dividend ETF owns 100 stocks that paid dividends in each of the previous five years. Stocks are screened for inclusion in the index by dividend yield, dividend-per-share growth rate, and dividend payout ratio.
This fund tracks the Dow Jones U.S. Select Dividend Index. It has a current yield of 3.32% and an expense ratio of 0.39% as of April 2021. In addition, an average of 675.55 million shares of the fund traded across all U.S. exchanges over 30 days.
The iShares Preferred and Income Securities ETF is a high-dividend index fund comprising shares of preferred stock. Most of the preferred shares of stock in this fund are issued by financial institutions, such as banks and insurance companies.
The fund tracks the ICE Exchange-Listed Preferred & Hybrid Securities Index. The dividend fund features a current yield of 4.77% and an expense ratio of 0.46%.
The WisdomTree U.S. Total Dividend Fund owns 667 U.S. stocks that are weighted by expected dividend yield rather than the traditional approach of weighting stocks by a company's market value. The dividend-weighted approach allows you to proportionately own more stock in companies that pay higher dividends. The fund tends to give the most weight to the information technology and financial sectors.
This high-dividend index fund tracks the Wisdom Tree U.S. Dividend Index. It offers a current 12-month yield of 2.68% and comes with an expense ratio of 0.28% as of April 2021.
Role of Dividend Index Funds in Your Portolio
Investing in high-dividend index funds exposes you to dividend-paying stocks that can serve as a sustainable income stream during retirement, and hedge against inflation.
However, dividends are never guaranteed. A company can choose to reduce or eliminate its dividend at any time—for example, during an economic downturn, when its profits might fall. The share price will also usually go down when this happens, which could reduce the value of assets you invest in the fund.
For this reason, dividend-producing investments should be part of a diversified portfolio that you assemble and manage through a holistic investment plan. They should not be used as a sole source of retirement income for most investors.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.